Banks in the U.S. are still leery of issuing loans to local small businesses, but one nonprofit says it has figured out a way of getting a 90% repayment rate on business loans to the types of people no financial institution would trust–young people in poor African countries without as much as a permanent address.

“You are sending hundreds of dollars to low-income 22-years-olds living in shacks in the slums of Nairobi. It sounds like a scam,” said Julia Kurnia, founder and director of Zidisha, a nonprofit that hosts an online peer-to-peer lending platform that funds small loans to entrepreneurs, mostly in Africa. Ms. Kurnia says the repayment rate for loans issued in 2014 is more than 90%.

The repayment rate has risen significantly as Ms. Kurnia deployed technology she said she learned about in Silicon Valley. Ms. Kurnia participated in Y Combinator’s accelerator this past winter, after the program began accepting nonprofits.

Ms. Kurnia said that Y Combinator and several prominent technology entrepreneurs and investors have just donated about $234,000 to her nonprofit.

“I had been spending years trying to raise interest about Zidisha in the traditional nonprofit and foundation circles of the East Coast,” Ms. Kurnia said. She said that such organizations, the traditional funders of charity work, advised her to set up brick-and-mortar loan processing offices, similar to the ones run by other micro-lending organizations.

Ms. Kurnia, on the other hand, thought that direct peer-to-peer lending, similar to the lending platforms run by startups like Lending Club Corp. and Prosper Marketplace Inc., is much more efficient, less costly and no less risky. “It’s an eBay-style marketplace that eliminates all local banks,” she said.

This type of lending is possible in Africa now because many people have access to the Internet. “Street kids in Somalia are on Facebook,” Ms. Kurnia said.

That resonated in Silicon Valley, she said. “They’d fund us much more easily,” she said of the Silicon Valley community.

In the recent round of donations, Zidisha received money from Paul Graham, founder of Y Combinator, as well as Eric Wu, Yun-Fang Juan, Alexis Ohanian, Haroon Mokhtarzada and Geoff Ralston. Paul Buchheit, the creator of Gmail and a Y Combinator partner, donated $100,000 earlier this year, and Y Combinator also issued a small donation that helped cover Ms. Kurnia’s stay in California during the accelerator program, she said.

Like several startups, Zidisha is using social-network verification as one of the necessary steps in approving applicants. That’s a tool increasingly employed by a variety of lenders in the U.S., many of them startups, such as Kabbage Inc.

It also recently deployed machine-learning algorithms from another Y Combinator graduate, Sift Science, to help weed out fraudulent applications, Ms. Kurnia said. And to calculate credit risk, Zidisha is using the services of Bayes Impact, also a nonprofit, which gets data scientist teams to tackle social problems.

“We have enough data so that we can use data science to develop an algorithm to predict not just fraud but also credit risk,” she said. Bayes Impact also went through the Y Combinator accelerator.

Another way of lowering the risk to lenders on its platform is to start any new applicant with a $50 loan. Only after a loan is repaid on time can the applicant request more money. The loan amounts go up in increments, all depending on repayment records, Ms. Kurnia said.

Ms. Kurnia expects loans issued now would be repaid at a 90% rate. That’s up from about 70% to 85% of a repayment rate on loans issued in early 2013.

Because of Zidisha’s office-less structure, borrowers in Kenya, for example, have a 10% annualized cost on Zidisha’s loans, compared to roughly 50% interest on typical microfinance loans in the country, Ms. Kurnia said.

Half of that Zidisha 10% interest goes to the lender and half to Zidisha. Ms. Kurnia said that the nonprofit is currently self-sustaining and doesn’t depend entirely on donations.

Right before Zidisha joined Y Combinator its lending amounts flattened, she said, but they picked up fast after Ms. Kurnia returned.

In the past 12 months Zidisha funded more than $1 million in loans toward 4,384 projects. Zidisha projects included funding a cybercafe where residents learn information technology skills, as well as the purchase of a sewing machine to sew bags.

UPDATE: This story was changed to remove a reference to a competitor, micro-lending nonprofit Kiva.org. The earlier version of the story said Kiva charges interest for loans that is separate from interest charged by its Field Partners. It does not.

Comments (5 of 22)

I can confirm everything "disillusioned" wrote on December 31. Have been banned twice from the forum for nothing, but @Julia is happy enough to keep my money. Zidisha? I'll have a great party as soon as I'm definitely out of it.

7:18 am December 31, 2014

disillusioned wrote:

Hi Sam and Martin,
it's always difficult to say what is scam and what is simply incompetence and out-of-control craziness.
According to the own Zidisha statistic 21% of the principal invested there is written-off, i.e. is defaulted. If you add to that almost 9% that is repaying over 30 days late (and most loans at Zidisha have a weekly schedule!) that is 30% of lender capital lost.

Have things got better? For loans disbursed in the last year: altready 6% has been written-off (but please note that write-offs occur only with loans that are past due 6 months or more! so not many 1-year-old loans are even elegible for defaults) and 14% are paying late. So here we have already a 20% loss.

And this on a platform that allows borrowers to reschedules loans up to eternity - it's no exception to have loans that were posted with a 1-2 month term being rescheduled for 4-5 years or more (and as long as they make this new micro-repayments on-time they will not be counted as being late).

Even worse than this very poor repayment track record however is how disrespectfully Zidisha and in particular Julia Kurnia treats lenders. Banning lenders who complain and censoring (deleting) their posts is the norm now on Zidisha.

But it's not enough: 2 weeks ago Zidisha changed the rules of the game and now lenders are obliged to either re-lend or withdraw their credit within 60 days of each repayment. If you don't relend or withdraw Zidisha will automatically re-lend your money for you (even if you have auto-lending OFF!). So now lenders are not even allowed to wait and see if (a) things will improve as promised and/or (b) wait to find I loan that the actually want to support - and not simply a random borrower who posted his/her application online (and there are some very very bad applications online, without picture, without real business plan, etc). If you want to choose yourself you have to go in-and-out of Zidisha to withdraw and upload money on a monthly basis (and very often repayments are just a couple of dollars or less). But who cares: lenders and not Zidisha or borrowers are paying the paypal fees. Try to complain - as 2 lenders did a couple of days ago - and your posts will be deleted within hours and you will be possibly be banned!!

1:35 am December 14, 2014

Sam wrote:

Hey Martin! I would like to disagree with you here. I invested some amount and I got all of it back with decided interest. Everything was very transparent and it was by far the best experience I had with any non-profit. Did you have a bad experience with them?

4:51 pm December 12, 2014

Martin wrote:

These guys are scammers. Stay away! They do not check borrowers and you'll lost all your money.

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